How to Read A Contract as An Entrepreneur (Who Didn't Go to Law School)

Contracts 101

When you operate a business, contracts are as common as the air that you breathe.

You enter contracts by clicking “I Agree” buttons on websites, and by selling products and services to your customers.

A contract is a legally binding agreement between two or more persons for a particular purpose.

Contracts can be done verbally or in writing.  The problem for a business owner with a verbal contract is that if is more difficult to enforce because you may not remember or be able to prove all of the terms that were agreed to.

What if a supplier presents you with a “standard” contract that they routinely use with companies they deal with. Does this mean that you should just sign it?

At the very least, you should understand what you is agreeing to in the contract. At best, you can find a few important items in the contract and improve your business’ position through proper drafting and negotiation.

What to look for:

• Parties – You should make sure that your business is properly identified in the contract.  If your business is incorporated, the company (not the owner personally) will sign the contract.  The owner or signing officer signs on behalf of the company.
• Term – When will the contract begin and end? Will it be possible to renew the contract? Can the contract be terminated if things are not working out?
• Price – Is there a fixed price list for devices to be supplied? What if the cost for these devices increases?
• Scope – The contract should clearly set out the scope of the products and any related services to be delivered. Any ambiguity or disagreements should be resolved before the contract is signed.
• Payment – You will want to be clear about how much and how your business will get paid. This should all be clearly stated in the contract, including payment terms, payment methods, refund policy, deposits, etc.
• Risk Allocation – Think about all of the things that could go wrong. What does the contract say if these things happen? How can you protect your business if any of these things happen? What if certain products become unavailable? What if the supplier goes out of business?
• Legalese – Don’t just skip over the legalese. Clauses dealing with such things as force majeure, attornment, governing laws and assignment could be important in how they apply to you. If you don’t understand these, ask someone who does.